ANNUAL REPORT USAA EXTENDED MARKET INDEX FUND DECEMBER

Transcription

1 ANNUAL REPORT USAA EXTENDED MARKET INDEX FUND DECEMBER 31, 2017

2 PRESIDENT S MESSAGE One way to ensure that you are doing the most with what you have is to invest a set amount each month, a tactic known as dollar-cost averaging. February 2018 The reporting period ended December 31, 2017, was remarkable, as stock prices went up and bonds did well. From the results, you d never know how many worries investors had to overcome during the reporting period. Among geopolitical disruptions, natural disasters, political gridlock over U.S. fiscal policy, and the speed and scope of the Federal Reserve (Fed) interest rate increases there was plenty to be concerned about, but investors generally maintained composure and with it, their appetite for risk. In 2017, stocks experienced one of their best years in recent memory, strengthened by synchronized global economic growth and supportive inflation. Emerging markets stocks were the standout performers, followed by developed markets stocks and U.S. stocks all of which generated double-digit gains. Better-than-expected corporate earnings also supported the rally in global stocks. Looking ahead, we believe stock prices could continue to rise, though 2018 s returns may not be as stellar as those in In the United States, the new federal tax law, which became effective in January 2018, lowers the corporate tax rate from 35% to 21% and could increase companies cash flows as well as their bottom lines. That said, some of the potential appreciation may already have occurred during December Meanwhile, emerging markets and developed markets stocks are generally inexpensive when compared to U.S. stocks, and therefore may offer an appealing long-term investment opportunity. As for the bond markets, they were dominated during the reporting period by investor expectations about the Fed s monetary policy. In 2017, Fed policymakers followed through on their plan to increase short-term interest rates three times, raising the federal funds target rate in March, June, and December of 2017 to a range of between 1.25% and 1.50% by the end of the year. The Fed also said three interest rate increases are anticipated for 2018, as long as the U.S. economy continued to perform as it expected. In this gradually rising interest rate environment, we believe short-term bonds may

3 be attractive, as they offer an opportunity to earn incremental income with less exposure to declining bond prices. (Bond prices and interest rates move in opposite directions.) Long-term interest rates fell during the reporting period as strong investor demand pushed up stock prices; remember, the market, not the Fed, sets long-term interest rates. As a result, the 30-year U.S. Treasury was one of the best-performing fixed income assets of At the same time, credit spreads narrowed. Credit spreads are the difference in yields between corporate bonds and U.S. Treasury securities of similar maturity. With global interest rates near historic lows, investors were willing to take on more risk for the incrementally larger yields available in the corporate bond market. At USAA Investments, we think ongoing economic growth and solid corporate earnings could continue supporting investmentgrade and high-yield corporate bonds during No one can predict the movements of the financial markets. Investors were able to shrug off their worries during 2017, but many of the same concerns remain in At the December 2017 policy meeting, Fed officials discussed whether tax cuts might require them to raise short-term interest rates faster than anticipated, raising the concern of an interest-rate shock. An interestrate shock occurs when interest rates suddenly change. Should the Fed be too aggressive with interest-rate policy, it might dampen U.S. economic growth. Due to an unknown future, we believe it is important for investors to maintain diversified portfolios that are based on their individual goals, time horizon, and risk tolerance. The first months of a new year can be an appropriate time to look at your overall financial situation. One way to ensure that you are doing the most with what you have is to invest a set amount each month, a tactic known as dollar-cost averaging. At USAA Investments, we are committed to helping you meet your financial objectives. From all of us here, thank you for the opportunity to help you with your investment needs. Sincerely, Brooks Englehardt President USAA Investments Investments provided by USAA Investment Management Company and USAA Financial Advisors, Inc., both registered broker-dealers, and affiliates. Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

4 TABLE OF CONTENTS Fund Objective 1 Managers Commentary on the Fund 2 Investment Overview 4 Financial Information USAA Extended Market Index Fund: Distributions to Shareholders 8 Report of Independent Registered Public Accounting Firm 9 Financial Statements 10 Financial Highlights 13 Notes to Financial Statements 14 Expense Example 21 Trustees and Officers Information 23 Master Extended Market Index Series: Report of Independent Registered Public Accounting Firm 33 Schedule of Investments 38 Financial Statements 85 Financial Highlights 88 Notes to Financial Statements 89 Officers and Directors Information 106 This report is for the information of the shareholders and others who have received a copy of the currently effective prospectus of the Fund, managed by USAA Asset Management Company. It may be used as sales literature only when preceded or accompanied by a current prospectus, which provides further details about the Fund. 2018, USAA. All rights reserved.

5 FUND OBJECTIVE The USAA Extended Market Index Fund (the Fund) seeks to match, before fees and expenses, the performance of the U.S. stocks not included in the S&P 500 Index as represented by the Dow Jones U.S. Completion Total Stock Market Index SMI. The Dow Jones U.S. Completion Total Stock Market Index measures the performance of all small- and mid-cap stocks as measured by the Dow Jones U.S. Total Stock Market Index SM less the stocks in the S&P 500 Index. Types of Investments The Fund s principal investment strategy is to invest all its investable assets in the Master Extended Market Index Series of the Quantitative Master Series LLC (Extended Market Portfolio), which is a separate registered mutual fund advised by BlackRock Advisors, LLC (BlackRock), with a substantially similar investment objective as the Fund. Therefore, you have an indirect interest in the Extended Market Portfolio s underlying securities, and the investment characteristics of the Fund will correspond directly to those of the Extended Market Portfolio. This type of arrangement is commonly referred to as a master-feeder structure. The Extended Market Portfolio seeks to track, before fees and expenses, the performance of the Dow Jones U.S. Completion Total Stock Market Index as closely as possible. Normally, at least 80% of its assets will be invested in securities or other financial instruments of companies that are components of, or have economic characteristics similar to, the securities included in the Dow Jones U.S. Completion Total Stock Market Index. IRA DISTRIBUTION WITHHOLDING DISCLOSURE We generally must withhold federal income tax at a rate of 10% of the taxable portion of your distribution and, if you live in a state that requires state income tax withholding, at your state s tax rate. However, you may elect not to have withholding apply or to have income tax withheld at a higher rate. Any withholding election that you make will apply to any subsequent distribution unless and until you change or revoke the election. If you wish to make a withholding election or change or revoke a prior withholding election, call (800) 531-USAA (8722) or (210) If you do not have a withholding election in place by the date of a distribution, federal income tax will be withheld from the taxable portion of your distribution at a rate of 10%. If you must pay estimated taxes, you may be subject to estimated tax penalties if your estimated tax payments are not sufficient and sufficient tax is not withheld from your distribution. For more specific information, please consult your tax adviser. Fund Objective 1

6 MANAGERS COMMENTARY ON THE FUND BlackRock Advisors, LLC Alan Mason Greg Savage, CFA Rachel M. Aguirre Creighton Jue, CFA Jennifer Hsui, CFA n How did the USAA Extended Market Index Fund (the Fund) perform? For the reporting period ended December 31, 2017, the Fund had a total return of 17.72%, while the benchmark Dow Jones U.S. Completion Total Stock Market Index SM (the Benchmark Index) returned 18.20%. n Describe the market environment. The U.S. economy demonstrated strength throughout the reporting period. Unemployment fell to 4.1%, the lowest level since Additional highlights that helped strengthen investor confidence in the macro picture included a nominal third quarter GDP which surged 4.1%, real GDP which increased 2.3%, and broad aggregate S&P 500 earnings growth of 6.6% in This optimism was expressed throughout many soft indicators. For example, both the University of Michigan Consumer Sentiment Survey and the National Federation of Independent Business Small Business Optimism Index reached 13-year highs during the reporting period. On the policy front, investors balanced the normalization of accommodative monetary policy with expectations of expansionary fiscal policy. The Federal Reserve s decision to increase interest rates in Past performance is no guarantee of future results. Refer to page 5 for benchmark definition. 2 USAA Extended Market Index Fund

7 December 2017 pushed shorter-dated U.S. Treasury yields higher in the last quarter of In fiscal policy, President Trump signed into law the largest tax-overhaul plan since 1986 on December 22, Although the legislation is forecasted by the Joint Committee on Taxation to raise the federal deficit by $1.5 trillion over the next ten years, U.S. ten-year Treasury yields remained relatively low throughout the last quarter of 2017, with the ten-year U.S. Treasury yield ending the year at 2.4%, 0.05% lower than at the start of n Describe the portfolio positioning at period end. During the reporting period, as changes were made to the composition of the Benchmark Index, the Series purchased and sold securities to maintain its objective of replicating the risks and return of the Benchmark Index. n Describe the portfolio positioning at period end. The Series remains positioned to attempt to match the risk characteristics of the Benchmark Index, irrespective of the market s future direction. The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results. Investing involves risks including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 31, 2017, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Prepared by BlackRock Investments, LLC, member FINRA BlackRock, Inc. All rights reserved. Managers Commentary on the Fund 3

8 INVESTMENT OVERVIEW USAA EXTENDED MARKET INDEX FUND (THE FUND) (Ticker Symbol: USMIX) 12/31/17 12/31/16 Net Assets $765.2 Million $671.7 Million Net Asset Value Per Share $18.98 $17.34 AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/17 1 Year 5 Years 10 Years 17.72% 13.99% 8.68% EXPENSE RATIO AS OF 12/31/16* 0.48% High double-digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently achieved in the future. The performance data quoted represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance data quoted. The return and principal value of an investment will fluctuate, so that an investor s shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month-end, visit usaa.com. * The expense ratio represents the total annual operating expenses, before reductions of any expenses paid indirectly and including the Fund s share of the allocated expenses of the Master Extended Market Index Series, as reported in the Fund s prospectus dated May 1, 2017, and is calculated as a percentage of average net assets. This expense ratio may differ from the expense ratio disclosed in the Financial Highlights. Total return measures the price change in a share assuming the reinvestment of all net investment income and realized capital gain distributions, if any. The total returns quoted do not reflect adjustments made to the enclosed financial statements in accordance with U.S. generally accepted accounting principles or the deduction of taxes that a shareholder would pay on net investment income and realized capital gain distributions, including reinvested distributions, or redemptions of shares. 4 USAA Extended Market Index Fund

9 n CUMULATIVE PERFORMANCE COMPARISON n $25,000 $23,990 $22,991 $20,000 $15,000 $10,000 $5,000 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 Dow Jones U.S. Completion Total Stock Market Index* $23,990 USAA Extended Market Index Fund $22,991 Data from 12/31/07 to 12/31/17. The graph illustrates how a $10,000 hypothetical investment in the USAA Extended Market Index Fund closely tracks the Dow Jones U.S. Completion Total Stock Market Index, which is a market-capitalizationweighted index of more than 3,000 U.S. equity securities. It includes all the stocks in the Dow Jones U.S. Total Stock Market Index except for stocks included in the S&P 500 Index. Past performance is no guarantee of future results, and the cumulative performance quoted does not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of shares. Indexes are unmanaged and you cannot invest directly in an index. The return information for the indexes does not reflect the deduction of any fees, expenses, or taxes. *The Dow Jones U.S. Completion Total Stock Market Index is a subset of the Dow Jones U.S. Total Stock Market Index that excludes components of the S&P 500 Index. The Dow Jones U.S. Total Stock Market Index is an all-inclusive measure composed of all U.S. equity securities with readily available prices. This broad index is divided according to stock-size segment, style, and sector to create distinct sub-indexes that track every major segment of the market. Investment Overview 5

10 Dow Jones U.S. Completion Total Stock Market Index is a service mark of Dow Jones & Company, Inc. Dow Jones does not have any relationship to the Fund other than the licensing and sublicensing of the Dow Jones U.S. Completion Total Stock Market Index and its service marks for use in connection with the Fund. Dow Jones does not sponsor, endorse, sell, or promote the Fund; recommend that any person invest in the Fund or any other securities; have any responsibility or liability for or make any decisions about the timing, amount, or pricing of the Fund; have any responsibility or liability for the administration, management, or marketing of the Fund; consider the needs of the Fund or the owners of the Fund in determining, composing, or calculating the Dow Jones U.S. Completion Total Stock Market Index, or have any obligation to do so. Dow Jones will have no liability in connection with the Fund. Specifically, Dow Jones makes no warranty, express or implied, and Dow Jones disclaims any warranty about: the results to be obtained by the Fund, the owner of the Fund, or any other person in connection with the use of the Dow Jones U.S. Completion Total Stock Market Index and the data included in the Dow Jones U.S. Completion Total Stock Market Index; the accuracy or completeness of the Dow Jones U.S. Completion Total Stock Market Index and any related data; the merchantability and the fitness for a particular purpose or use of the Dow Jones U.S. Completion Total Stock Market Index and/or its related data; Dow Jones will have no liability for any errors, omissions, or interruptions in the Dow Jones U.S. Completion Total Stock Market Index or related data; under no circumstances will Dow Jones be liable for any lost profits or indirect, punitive, special, or consequential damages or losses, even if Dow Jones knows that they might occur. The licensing agreement between BlackRock Advisors, LLC (or its predecessor), and Dow Jones, and the sublicensing agreement between the Fund and BlackRock Advisors, LLC (or its predecessor), are solely for the benefit of the parties to these agreements and not for the benefit of the owners of the USAA Extended Market Index Fund or any other third parties. 6 USAA Extended Market Index Fund

11 n TOP 10 HOLDINGS 12/31/17 n (% of Net Assets)* Tesla Inc % Las Vegas Sands Corp % ServiceNow, Inc % Liberty Global PLC, Class C % T-Mobile U.S., Inc % FleetCor Technologies, Inc % Dell Technologies, Inc., Class V % Markel Corp % BioMarin Pharmaceutical, Inc % Twitter, Inc % n TOP 10 INDUSTRY SECTORS 12/31/17 n (% of Net Assets)* Software & Computer Services % Real Estate Investment Trusts (REITS) % Banks % Pharmaceuticals & Biotechnology % Financial Services % Technology Hardware & Equipment % Travel & Leisure % General Retailers % Health Care Equipment & Services % Support Services % *Percentages are of the net assets of the Master Extended Market Index Series (the Series), not the net assets of the Fund. You will find a complete list of securities that the Series owns on pages Investment Overview 7

12 DISTRIBUTIONS TO SHAREHOLDERS The following federal tax information related to the Fund s fiscal year ended December 31, 2017, is provided for information purposes only and should not be used for reporting to federal or state revenue agencies. Federal tax information for the calendar year will be reported to you on Form 1099-DIV in January With respect to distributions paid, the Fund designates the following amounts (or, if subsequently determined to be different, the maximum amount allowable) for the fiscal year ended December 31, 2017: Dividend Received Qualified Dividend Long-Term Qualified Deduction (corporate Income (non-corporate Capital Gain Interest shareholders) (1) shareholders) (1) Distributions (2) Income 61.56% 65.38% $44,076,959 $67,027 (1) Presented as a percentage of net investment income and short-term capital gain distributions paid, if any. (2) Pursuant to Section 852 of the Internal Revenue Code. 8 USAA Extended Market Index Fund

13 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Trustees of USAA Extended Market Index Fund: Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities of USAA Extended Market Index Fund (the Fund ) (one of the portfolios constituting the USAA Mutual Funds Trust (the Trust )), including the portfolio of investments, as of December 31, 2017, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the financial statements ). In our opinion, the financial statements present fairly, in all material respects, the financial position of USAA Extended Market Index Fund (one of the portfolios constituting the USAA Mutual Funds Trust) at December 31, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Trust s management. Our responsibility is to express an opinion on the Fund s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ( PCAOB ) and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2017, by correspondence with the Master Extended Market Index Series. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the auditor of one or more USAA investment companies since San Antonio, Texas February 28, 2018 Report of Independent Registered Public Accounting Firm 9

14 STATEMENT OF ASSETS AND LIABILITIES December 31, 2017 ASSETS Investment in Master Extended Market Index Series, at fair value $765,314,238 Receivables: Capital shares sold 452,544 Total assets 765,766,782 LIABILITIES Payables: Capital shares redeemed 452,544 Accrued transfer agent s fees 22,927 Other accrued expenses and payables 80,263 Total liabilities 555,734 Net assets applicable to capital shares outstanding $765,211,048 NET ASSETS CONSIST OF: Paid-in capital $515,308,941 Accumulated undistributed net investment income 859,634 Accumulated net realized loss on investments and futures transactions (3,279,448) Net unrealized appreciation of investments and futures contracts 252,321,923 Net unrealized depreciation of foreign currency translations (2) Net assets applicable to capital shares outstanding $765,211,048 Capital shares outstanding, no par value 40,310,029 Net asset value, redemption price, and offering price per share $ See accompanying notes to financial statements and accompanying financial statements of the Master Extended Market Index Series (the Series) attached. 10 USAA Extended Market Index Fund

15 STATEMENT OF OPERATIONS Year ended December 31, 2017 INVESTMENT INCOME Allocated from Master Extended Market Index Series: Dividends - unaffiliated $ 9,048,830 Foreign taxes withheld (7,229) Securities lending - affiliated 601,915 Dividends - affiliated 131,863 Total income 9,775,379 Expenses (Note 4D) (329,505) Net allocated investment income 9,445,874 FUND EXPENSES Administration and servicing fees 1,792,398 Transfer agent s fees 716,385 Custody and accounting fees 9,289 Postage 48,663 Shareholder reporting fees 38,732 Trustees fees 33,000 Registration fees 31,590 Professional fees 117,000 Other 19,000 Total Fund expenses 2,806,057 NET INVESTMENT INCOME 6,639,817 NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS, FOREIGN CURRENCY AND FUTURES CONTRACTS ALLOCATED FROM MASTER EXTENDED MARKET INDEX SERIES Net realized gain on: Investment transactions 39,632,273 Futures transactions 1,314,290 Change in net unrealized appreciation/(depreciation) of: Investments 69,651,238 Foreign currency translations 1 Futures contracts 154,589 Net allocated realized and unrealized gain 110,752,391 Increase in net assets resulting from operations $117,392,208 See accompanying notes to financial statements and accompanying financial statements of the Series attached. Financial Statements 11

16 STATEMENTS OF CHANGES IN NET ASSETS Years ended December 31, FROM OPERATIONS Net investment income $ 6,639,817 $ 6,971,514 Net realized gain on investments 39,632,273 36,304,400 Net realized gain on futures transactions 1,314,290 1,795,909 Change in net unrealized appreciation/(depreciation) of: Investments 69,651,238 45,209,562 Foreign currency translations 1 (2) Futures contracts 154,589 (6,022) Increase in net assets resulting from operations 117,392,208 90,275,361 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (7,270,213) (6,914,487) Net realized gains (46,582,170) (37,885,526) Distributions to shareholders (53,852,383) (44,800,013) FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 66,396,298 55,282,842 Reinvested dividends 52,983,264 44,168,297 Cost of shares redeemed (89,411,665) (92,847,593) Increase in net assets from capital share transactions 29,967,897 6,603,546 Net increase in net assets 93,507,722 52,078,894 NET ASSETS Beginning of year 671,703, ,624,432 End of year $765,211,048 $671,703,326 Accumulated undistributed net investment income: End of year $ 859,634 $ 833,595 CHANGE IN SHARES OUTSTANDING Shares sold 3,603,444 3,353,335 Shares issued for dividends reinvested 2,792,892 2,483,563 Shares redeemed (4,822,841) (5,690,503) Increase in shares outstanding 1,573, ,395 See accompanying notes to financial statements and accompanying financial statements of the Series attached. 12 USAA Extended Market Index Fund

17 FINANCIAL HIGHLIGHTS Contained below are selected ratios and supplemental data for the periods indicated for the USAA Extended Market Index Fund. Year Ended December 31, Net asset value at beginning of period $ $ $ $ $ Income (loss) from investment operations: Net investment income Net realized and unrealized gain (loss) on investments and futures transactions (.81) Total from investment operations (.67) Less distributions from: Net investment income (.18) (.18) (.15) (.16) (.13) Realized capital gains (1.24) (1.05) (1.14) (.70) (.52) Total distributions (1.42) (1.23) (1.29) (.86) (.65) Net asset value at end of period $ $ $ $ $ Total return (%)* (3.76) Net assets at end of period (000) $765,211 $671,703 $619,624 $660,930 $615,739 Ratios to average net assets:** Expenses, including expenses of the Master Extended Market Index Series (%) (a) (b) Expenses before reimbursements, including expenses of the Master Extended Market Index Series (%) (a) Net investment income (%) Portfolio turnover (%)*** * Assumes reinvestment of all net investment income and realized capital gain distributions, if any, during the period. Includes adjustments in accordance with U.S. generally accepted accounting principles and could differ from the Lipper reported return. Total returns for periods of less than one year are not annualized. ** For the year ended December 31, 2017, average net assets were $716,917,349. *** Represents the portfolio turnover of the Master Extended Market Index Series (the Series). (a) Reflects total annual operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund s expenses paid indirectly decreased the expense ratios as follows: (.00%) Represents less than 0.01% of average net assets. (b) Prior to May 1, 2015, the Manager had voluntarily agreed to limit the annual expenses of the Fund to 0.50% of the Fund s average net assets. See accompanying notes to financial statements and accompanying financial statements of the Series attached. Financial Highlights 13

18 NOTES TO FINANCIAL STATEMENTS December 31, 2017 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act of 1940, as amended (the 1940 Act), is an open-end management investment company organized as a Delaware statutory trust consisting of 51 separate funds. The USAA Extended Market Index Fund (the Fund) qualifies as a registered investment company under Accounting Standards Codification Topic 946. The information presented in this annual report pertains only to the Fund, which is classified as diversified under the 1940 Act and is authorized to issue an unlimited number of shares. The Fund s primary investment objective is to seek to match, before fees and expenses, the performance of the U.S. stocks not included in the S&P 500 Index as represented by the Dow Jones U.S. Completion Total Stock Market Index. USAA Asset Management Company (the Manager), an affiliate of the Fund, attempts to achieve this objective by investing all of the Fund s investable assets in the Master Extended Market Index Series (the Series) of the Quantitative Master Series LLC (Master LLC), which is a separate openend investment management company advised by BlackRock Advisors, LLC (BlackRock), with a substantially similar investment objective. At December 31, 2017, the Fund s investment was 99.9% of the Series. The financial statements of the Series, including the Schedule of Investments, are contained later in this report and should be read in conjunction with the Fund s financial statements. See Table of Contents for location. A. Valuation of investments The Fund records its investment in the Series at fair value, which reflects its proportionate interest in the net assets of the Series. Valuation of the securities held by the Series is discussed in Note 3 of the Series Notes to Financial Statements included later in this report. 14 USAA Extended Market Index Fund

19 B. Fair value measurements Refer to the Schedule of Investments of the Series for a discussion of fair value measurements and a summary of the inputs used to value the Series assets. C. Derivative financial instruments Refer to Note 5 in the Series Notes to Financial Statements for a discussion of derivative financial instruments and how they are accounted for in the Series financial statements. D. Investment income and expenses The Fund records daily its pro rata share of the Series income, expenses, and realized and unrealized gains and losses. In addition, the Fund accrues its own expenses. E. Foreign taxation Foreign income and capital gains on some foreign securities may be subject to foreign taxes, which are reflected as a reduction to such income and realized gains. The Fund records a liability based on unrealized gains to provide for potential foreign taxes payable upon the sale of these securities. Foreign taxes have been provided for in accordance with the Fund s understanding of the applicable countries prevailing tax rules and rates. F. Federal taxes The Fund s policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its taxable income and net capital gains, if any, to its shareholders. Therefore, no federal income tax provision is required. For the year ended December 31, 2017, the Fund did not incur any income tax, interest, or penalties, and has recorded no liability for net unrecognized tax benefits relating to uncertain income tax positions. On an ongoing basis, the Manager will monitor the Fund s tax positions to determine if adjustments to this conclusion are necessary. The statute of limitations on the Fund s tax return filings generally remain open for the three preceding fiscal reporting year ends and remain subject to examination by the Internal Revenue Service and state taxing authorities. G. Expenses paid indirectly Through arrangements with the Fund s custodian and other banks utilized by the Fund for cash management purposes, realized credits, if any, generated from cash balances in the Fund s bank accounts may be used to directly reduce the Fund s Notes to Financial Statements 15

20 expenses. For the year ended December 31, 2017, there were no custodian and other bank credits. H. Indemnifications Under the Trust s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business, the Trust enters into contracts that contain a variety of representations and warranties that provide general indemnifications. The Trust s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred. However, the Trust expects the risk of loss to be remote. I. Use of estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. (2) LINE OF CREDIT The Fund participates, along with other funds of the Trust and USAA ETF Trust (together, the Trusts), in a joint, short-term, revolving, committed loan agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of the Manager. The purpose of the agreement is to provide temporary or emergency cash needs, including redemption requests that might otherwise require the untimely disposition of securities. Subject to availability (including usage of the facility by other funds of the Trusts), the Fund may borrow from CAPCO an amount up to 5% of the Fund s total assets at an interest rate based on the London Interbank Offered Rate (LIBOR), plus basis points. The Trusts are also assessed facility fees by CAPCO in the amount of 13.0 basis points of the amount of the committed loan agreement. Prior to September 30, 2017, the maximum annual facility fee was 12.0 basis points of the amount of the committed loan agreement. The facility fees are allocated among the funds of the Trusts based on their respective average net assets for the period. The Trusts may request an optional increase of the committed loan agreement from $500 million up to $750 million. If the Trusts increase the 16 USAA Extended Market Index Fund

21 committed loan agreement, the assessed facility fee on the amount of the additional commitment will be 14.0 basis points. For the year ended December 31, 2017, the Fund paid CAPCO facility fees of $5,573, which represents 0.9% of the total fees paid to CAPCO by the funds of the Trusts. The Fund had no borrowings under this agreement during the year ended December 31, (3) DISTRIBUTIONS The character of any distributions made during the year from net investment income or net realized gains is determined in accordance with federal tax regulations and may differ from those determined in accordance with U.S. generally accepted accounting principles. Also, due to the timing of distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains were recorded by the Fund. During the current fiscal year, permanent differences between book-basis and tax-basis accounting for non-reit return of capital dividend adjustments resulted in reclassifications to the Statement of Assets and Liabilities to increase accumulated undistributed net investment income and accumulated net realized loss on investments by $656,435. These reclassifications had no effect on net assets. The tax character of distributions paid during the years ended December 31, 2017, and 2016, was as follows: Ordinary income* $ 9,775,424 $ 8,093,464 Long-term realized capital gain 44,076,959 36,706,549 Total distributions paid $53,852,383 $44,800,013 As of December 31, 2017, the components of net assets representing distributable earnings on a tax basis were as follows: Undistributed ordinary income* $ 943,060 Accumulated capital and other losses (1,138,058) Unrealized appreciation of investments 250,096,893 * Includes short-term realized capital gains, if any, which are taxable as ordinary income. Notes to Financial Statements 17

22 The difference between book-basis and tax-basis unrealized appreciation of investments is attributable to the tax deferral of losses on wash sales, partnership basis, passive foreign investment company and non-reit return of capital dividend adjustments. Distributions to shareholders are recorded on the ex-dividend date. Distributions of net investment income and the Fund s pro rata share of the Series realized gains from security transactions not offset by capital losses are made annually in the succeeding fiscal year or as otherwise required to avoid the payment of federal taxes. At December 31, 2017, the Fund had no capital loss carryforwards, for federal income tax purposes. Net capital losses incurred after October 31, and within the taxable year are deemed to arise on the first business day of the Fund s next taxable year. For the year ended December 31, 2017, the Fund deferred to January 1, 2018, post October capital losses of $1,138,058. Tax Basis of Investments The aggregate cost of investments for federal income tax purposes at December 31, 2017 was substantially the same for book purposes. The net unrealized appreciation/(depreciation) on investments, which consists of gross unrealized appreciation and depreciation, is disclosed below: Gross Gross Net Unrealized Unrealized Unrealized Appreciation/ Tax Cost Appreciation Depreciation (Depreciation) $515,212,358 $344,478,676 $(94,381,783) $250,096,893 (4) TRANSACTIONS WITH MANAGER A. Administration and servicing fees The Manager provides administration and shareholder servicing functions for the Fund. For such services, the Manager receives a fee accrued daily and paid monthly at an annualized rate of 0.25% of the Fund s average net assets for the fiscal year. For the year ended December 31, 2017, the Fund incurred administration and servicing fees, paid or payable to the Manager, of $1,792,398. In addition to the services provided under its Administration and Servicing Agreement with the Fund, the Manager also provides certain compliance and legal services for the benefit of the Fund. The Trust s 18 USAA Extended Market Index Fund

23 Board of Trustees (the Board) has approved the reimbursement of a portion of these expenses incurred by the Manager. For the year ended December 31, 2017, the Fund reimbursed the Manager $11,564 for these compliance and legal services. These expenses are included in the professional fees on the Fund s Statement of Operations. Out of the administration and servicing fees received from the Fund, the Manager pays BlackRock up to 0.10% for subadministration services provided on the Manager s behalf. For the year ended December 31, 2017, the Manager incurred subadministration fees, paid or payable to BlackRock, of $436,644. B. Transfer agent s fees USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services (SAS), an affiliate of the Manager, provides transfer agency services to the Fund based on an annual charge of $23 per shareholder account, plus out-of-pocket expenses. SAS pays a portion of these fees to certain intermediaries for the administration and servicing of accounts that are held with such intermediaries. For the year ended December 31, 2017, the Fund incurred transfer agent s fees paid or payable to SAS, of $716,385. C. Underwriting agreement The Manager provides exclusive underwriting and distribution of the Fund s shares on a continuing best-efforts basis. The Manager receives no commissions or fees for this service. D. Management agreement The Manager serves as investment adviser to the Fund pursuant to a Management Agreement and is responsible for monitoring the services provided to the Series by BlackRock. While the Fund maintains its investment in the Series, the Manager receives no fee from the Fund for the monitoring service performed on its behalf. Additionally, the expenses allocated to the Fund from the Series included fees waived by BlackRock Advisors, LLC of $9,434 (See Series Notes to Financials). Refer to Note 6 in the Series Notes to Financial Statements. (5) TRANSACTIONS WITH AFFILIATES The Manager is indirectly wholly owned by United Services Automobile Association (USAA), a large, diversified financial services institution. Notes to Financial Statements 19

24 Certain trustees and officers of the Fund are also directors, officers, and/or employees of the Manager. None of the affiliated trustees or Fund officers received any compensation from the Fund. (6) UPCOMING REGULATORY MATTERS In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final Rule Release No , Investment Company Reporting Modernization. In part, the rules require the filing of new forms N-PORT and N-CEN, and amend Regulation S-X to require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. In October 2016, the SEC issued Final Rule Release No , Investment Company Liquidity Risk Management Programs. This rule requires funds to establish a liquidity risk management program and enhances disclosures regarding funds liquidity. In October 2016, the SEC issued Final Rule Release No , Investment Company Swing Pricing. This rule permits certain funds to use swing pricing during periods of heavy redemptions and requires certain disclosures regarding the use of swing pricing in forms filed with the SEC. The Manager continues to evaluate the impact these rules and amendments will have on the financial statements and other disclosures. The compliance date for new forms N-PORT and N-CEN is June 1, 2018 (with filing of Form N-PORT beginning April 30, 2019), with other staggered compliance dates extending through April 30, The Fund is expected to comply with the June 1, 2018 compliance date for new forms N-PORT and N-CEN. (7) SUBSEQUENT EVENT On September 22, 2017, the Board approved (i) the conversion of the Fund from a feeder fund investing in the Master LLC, which is a separate registered mutual fund advised by BlackRock, to a stand-alone Fund investing directly in the securities that constitute the Dow Jones U.S. Completion Total Stock Market Index SM, and (ii) approved Mellon Capital Management Corporation as subadviser to the Fund. The conversion will be effected February 23, USAA Extended Market Index Fund

25 EXPENSE EXAMPLE December 31, 2017 (unaudited) EXAMPLE As a shareholder of the Fund, you incur two types of costs: direct costs, such as wire fees, redemption fees, and low balance fees; and indirect costs, including administration fees, transfer agency fees, expenses allocated to the Fund by the Master Extended Market Index Series (the Series), and other Fund operating expenses. This example is intended to help you understand your indirect costs, also referred to as ongoing costs (in dollars), of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period of July 1, 2017, through December 31, ACTUAL EXPENSES The line labeled actual in the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested at the beginning of the period, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the actual line under the heading Expenses Paid During Period to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The line labeled hypothetical in the table provides information about hypothetical account values and hypothetical expenses based on the Fund s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund s actual return. The hypothetical account Expense Example 21

26 values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any direct costs, such as wire fees, redemption fees, or low balance fees. Therefore, the line labeled hypothetical is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these direct costs were included, your costs would have been higher. Expenses Paid Beginning Ending During Period* Account Value Account Value July 1, 2017 July 1, 2017 December 31, 2017 December 31, 2017 Actual $1, $1, $2.27 Hypothetical (5% return before expenses) 1, , *Expenses are equal to the Fund s annualized expense ratio of 0.43%, which includes expenses of the Series, and is net of any reimbursements and expenses paid indirectly, multiplied by the average account value over the period, multiplied by 184 days/365 days (to reflect the one-half-year period). The Fund s actual ending account value is based on its actual total return of 9.86% for the six-month period of July 1, 2017, through December 31, USAA Extended Market Index Fund

27 TRUSTEES AND OFFICERS INFORMATION TRUSTEES AND OFFICERS OF THE TRUST The Board of Trustees (the Board) of the Trust consists of eight Trustees. These Trustees and the Trust s Officers supervise the business affairs of the USAA family of funds. The Board is responsible for the general oversight of the funds business and for assuring that the funds are managed in the best interests of each fund s respective shareholders. The Board periodically reviews the funds investment performance as well as the quality of other services provided to the funds and their shareholders by each of the fund s service providers, including USAA Asset Management Company (AMCO) and its affiliates. Pursuant to a policy adopted by the Board, the term of office for each Trustee shall be 20 years or until the Independent Trustee reaches age 72 or an Interested Trustee reaches age 65. The Board may change or grant exceptions from this policy at any time without shareholder approval. A Trustee may resign or be removed by a vote of the other Trustees or the holders of a majority of the outstanding shares of the Trust at any time. Vacancies on the Board can be filled by the action of a majority of the Trustees, provided that after filling such vacancy at least two-thirds of the Trustees have been elected by the shareholders. Set forth below are the Trustees and Officers of the Trust, their respective offices and principal occupations during the last five years, length of time served, and information relating to any other directorships held. Each serves on the Boards of the USAA family of funds consisting of two registered investment companies which, together, offer 57 individual funds. Unless otherwise indicated, the business address for each is P.O. Box , San Antonio, TX Trustees and Officers Information 23